Restatement Meaning Types Reasons And Examples

Restatement Meaning

Not all errors have the same impact. Material errors are those that affect the final reporting. These impact financial figures to the extent that it results in inaccurate analysis and comparison. Financial statements are restated to ensure that stakeholders get an accurate picture of the company’s financials.

Key Takeaways

A restatement is the amendment of financial statements pertaining to one or more previous accounting periods. It rectifies errors resulting from material misappropriation. Material errors include clerical faults, non-compliance with accounting standards, fraud, or inaccurate financial reporting. Restating a financial statement also arises when there are changes in the accounting standards, changes in GAAP, changes in the corporate structure, or changes in the type of reporting organization. Financial statements can be restated as a reissuance, revision, or out-of-period adjustment.

Restatement Explained

A restatement is changing something that has been declared previously. Financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more are restated to report errors. Not all errors have the same impact. Material errors are those that affect the final reporting. These errors impact financial figures to the extent that it results in inaccurate analysis and comparison.

Although accounting managers are responsible for presenting the correct financial reports every year, it is the auditors’ responsibility to find errors in them. Such misappropriations can be identified by the internal auditors or the external authorities.

The issuance of restated financial statements is necessary so that the stakeholdersStakeholdersA stakeholder in business refers to anyone, including a person, group, organization, government, or any other entity with a direct or indirect interest in its operations, actions, and outcomes.read more, investors, financiers, and creditors get the correct picture of a company.

Reasons to Restate a Financial Statement

GAAPGAAPGAAP (Generally Accepted Accounting Principles) are standardized guidelines for accounting and financial reporting.read more highlights the following three major reasons for restatement:

Accounting Error: This includes all accounting mistakes like recording errors, improper accounting methodsAccounting MethodsAccounting methods define the set of rules and procedure that an organization must adhere to while recording the business revenue and expenditure. Cash accounting and accrual accounting are the two significant accounting methods.read more, and lack of information. As a result, the financial statements have to be restated.Non-Compliance with GAAP: Statements that fail to meet the Generally Accepted Accounting Principles guideline or any other accounting standard require restatements.Fraud or Misrepresentation: If the company or its accounting personnel deliberately reported incorrect financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more in the previous years, restating becomes necessary.

If any of the above errors are found, it has to pass the materiality test. MaterialityMaterialityIn any financial accounting statements, there are some transactions that are too small to be recognized and such transactions might not have any impact on the analysis of the financial statement by an external observer; removal of such irrelevant information to keep the financial statement crisp and consolidated is called as the concept of materiality.read more is decided on the basis of impact. An error is considered material if it affects the stakeholders in their decision-making. Therefore, all errors do not need restating.

In addition to significant errors, there are some other errors:

Changes in GAAP: If accounting standards like GAAP put forth new accounting methods or rules applicable from the current accounting period, restarting is required. However, if applied retrospectively, such changes would impact prior statements as well. In order to facilitate comparison then, restatement becomes necessary.Changes of Reporting Entity: If there are changes to the corporate structure or ownership type of the business entityType Of The Business EntityA business entity is one that conducts business in accordance with the laws of the country. It can be a private company, a public company, a limited or unlimited partnership, a statutory corporation, a holding company, a subsidiary company, and so on.read more, the comparative statement of the previous years has to be restated. Restating is done only when there is a significant impact on financial reportingFinancial ReportingFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making.read more.

Types of Restatement

The errors found in the previous years’ financial statements determine the type of restatement the company has to proceed with. These are explained below:

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#1 – Non-Reliance Restatement

A reissuance or “Big R Restatement” is issued when there are mass errors found in statements pertaining to earlier periods. Mass errors render previous and current financial statements unreliable.

The company, therefore, must restate publicly by filing an 8K form—an audit opinion states the restatement. An audit opinion is a statement expressed by independent auditors to their client’s financial statements as the result of auditors’ examination.

#2 – Revision Restatement

The stealth or small r restatement is released when a consolidated material error is discovered in various financial statements pertaining to previous years. Since it cannot be rectified with a one-time adjustment, doing so will result in misrepresentation of the current period’s financial statement. Therefore, the company has to restate prior financial statements. This has to be mentioned in the footnotes of the current statements.

#3 – Out of Period Adjustments

If the degree of error is not significant enough to affect the reliability of any period’s financial statement, then it doesn’t require any restatement. However, its effect can be taken collectively and incorporated into the current financial statement. This should be accompanied by a disclosure note since it will affect the comparability.

Effect and Prevention

Every company should know the consequences of restating and ways to avoid one. Following are the effects of restating:

If restatement is issued because of integrity or operational issues, the stakeholder’s confidence in the company shatters. It generally results in excessive audit fees. The auditor has to dig into the errors and determine the type of restatement required for the particular case—it consumes a lot of time and effort.It furthers hampers the goodwill and credibility of the company since the investors, shareholders, and other associated parties lose trust in the firm’s accounting systemAccounting SystemAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company’s performance and ensuring the smooth operation of the firm.read more.Moreover, it undermines the company’s valuation and thus limits funding.

Following are the ways of avoiding restatements:

It is essential to conduct internal auditsInternal AuditsInternal audit refers to the inspection conducted to assess and enhance the company’s risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit.read more and accounts review before issuing the financial statement.Another crucial measure is to ensure a strong and effective internal controlInternal ControlInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company.read more system to check misappropriation and fraud.Firms should address the accounting issues and the smallest error before it’s too late. Firms must develop a culture of trust and transparency within the organization to eliminate chances of manipulation.It is equally important to have a team of expert accounting professionals who prepare accurate financial statements.

Restatement Example

Molson Coors Brewing Co. is a Chicago-based beverage company. They announced restated financial statements pertaining to 2016 and 2017. Molson’s financial reporting bore material weakness related to deferred tax liabilities resulting in accounting error in its income tax computation. Therefore, under the guidance of its audit committeeAudit CommitteeA company’s audit committee is a group of non-executive directors who are in charge of ensuring the integrity of internal controls, auditing, and financial reporting procedures. It works under the supervision of the Board of Directors and strives to sustain the corporate governance system.read more and Pricewater Coopers LLP, the firm decided to go for a non-reliance restatement of its financial statements.

Source – www.sec.gov